Tuesday, July 26, 2011

CHF Powers Ahead!

As it turns out, Asia had the direction right but the magnitude of the moves wrong as the USD fell further in early European trade. The slump in USD/CHF deserves the most attention with the pair capitulating from 0.8125 to a low 0.8021, dragging EUR/CHF from 1.1675 to a low of 1.1517 – though EUR was suffering a small amount of independent weakness following Moody’s decision to downgrade Greece from CAA1 to CA (4 notches) and a return of peripheral-Bund spread widening. Despite the ‘flight to quality’ in FX, US equity futures went no lower than the levels posted in yesterday’s Asian session, with S&P futures rallying from ~1,325 to just above 1,340 (currently 1,334). While talk of downgrades and default saw USTs widen to Bunds (11 bps) and Gilts (10 bps), if you needed confirmation that they still remain a ‘safe haven’, look no further than price action surrounding the rumour that a Washington D.C. building had been evacuated when 10s rallied 8 bps to 2.94% in a ‘heartbeat’. The quiet achievers amongst all this are the commodity currencies; USD/CAD is down from 0.9510 to 0.9460 (levels which prevailed prior to the soft CPI numbers) and AUD/USD is up from 1.0800 to 1.0850.

There are some interesting entries in the today’s Asian session diary. The House Democratic caucus meets behind closed doors (watch for headlines following its conclusion), Greek FinMin Venizelos speaks to the Petersen Institute and RBA Governor Stevens makes a speech. Later today, watch for earnings reports from UBS and Deutsche.

EUR was, to a degree, torn between a negative USD bias and rising risk aversion overnight and as such has been choppy within a $1.4336 - $1.4406 range (spot $1.4375-80). There was, for a change, surprising little EUR-centric news of note overnight with focus falling to the ECOFIN meeting on Thursday/Friday. Not that this lack of news prevented peripheral-Bund spread widening with Italy and Spain both 30bps wider to Bund across the curve.

USD: The standoff continued overnight with little progress on the debt debate following the weekend. Meanwhile, the data were not good. The Chicago Fed National Activity Index failed to bounce meaningfully from (a downwardly revised) -0.55 to -0.46, which we suggest means there will be little acceleration from the current tepid pace of growth. As a reminder, the consensus for Friday’s advance Q2 GDP estimate is now 1.8%. The Dallas Fed manufacturing activity index was a shade better than expected (-2.0 v. cons: -5.6). Support at 74.00 on the DXY is holding for now.

AUD: The short end of the AU yield curve was upward sloping last time RBA Governor Stevens spoke (on June 15th). We expect Governor Stevens’ remarks to keep the focus on the positive medium term picture for the Australian economy, which would look at odds with current pricing (~20 bps of easing priced by December). That said, if Stevens is to be consistent with recent RBA communication, he will again highlight the importance of tomorrow’s CPI data. NZD: Consensus is looking for an NZD400m trade surplus in June. NZD/USD struggled to match the performance of AUD/NZD, with NZD/USD back to 0.8645-50 from highs of 0.8678.

USD/CAD’s low of 0.9434 took the pair beneath pre-CPI levels, though spot has crept back up to 0.9465.